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Ch6 - Chapter 6 Measuring the Cost of Living Chapter 6 is...

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Chapter 6: Measuring the Cost of Living Chapter 6 is the second chapter of a two-chapter sequence that deals with how economists measure output and prices in the macroeconomy. Chapter 5 addressed how economists measure output. Chapter6 develops how economists measure the overall price level in the macroeconomy. By the end of this chapter, students should understand: how the consumer price index (CPI) is constructed. why the CPI is an imperfect measure of the cost of living. how to compare the CPI and the GDP deflator as measures of the overall price level. how to use a price index to compare dollar figures from different times. the distinction between real and nominal interest rates. Error in Table on page 38, workbook Quantity (2006) Price per unit (2006) Price per unit (2007) Cauliflower 100 heads $2.00 $3.00 Broccoli 50 bunches $1.50 $1.50 Potat oes 125 pounds $0.40 $0.80 Heads Up! What is the market basket? One of the problems students have in computing the CPI is the failure to use the right market basket. Remember the market basket is fixed. Usually it is the base year basket. Although actual consumption bundle changes from year to year, the CPI ignores this. In fact, the limitations of the CPI stem largely from holding the basket fixed. The meaning of indexation Indexation refers to the process of adjusting a nominal variable to keep purchasing power constant. Your text describes indexation as “the automatic correction of a dollar amount for the effects of inflation by law or contract” to refer to the government’s treatment of fixed incomes e.g. social security. However, the general definition is the one given above.
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Chapter 6, Worksheet 1, Page 42, Workbook 2. The table below shows a typical consumer's market basket. The base year is 1994.
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